The price of copper has fallen off a cliff and almost a third of its value has been wiped out. In April the metal cost $4.50 (U.S.) per pound. Now it’s $3.11.
That’s a pretty sobering stat if you’re someone like Aaron Regent, chief executive officer of Barrick Gold Corp. , who went out and paid $7.3-billion in cash for copper producer Equinox Minerals back in April.
At the time, Mr. Regent stressed that he wasn’t out buying simply for the sake of buying. This was about copper’s fundamentals. Copper supply is extremely tight, he said, and that is bound to keep the price high.
Fast forward a few months, and it turns out he isn’t the only one who feels this way. Fraser Phillips at RBC Dominion Securities has put out an in depth copper outlook note, and weak production is the dominant theme.
“Growth in mine production has not been able to keep up with the growth of smelting and refining capacity or the growth in refined copper demand...,” Mr. Phillips noted. The numbers prove this. There was pretty much zero mine production growth in 2008, followed by 2.6 per cent in 2009 and just 1 per cent in 2010.
Precisely Mr. Regent’s point. Sure the price of copper may have been a little overheated, but there aren’t many big new deposit discoveries to flood the market and dirve the price down.
However, production growth isn’t going to stall forever. Mr. Phillips points out that mine supply ramps up over the next five years, growing about 1 million ounces a year to total 4.9 million tonnes by 2015. Most of these projects are in Latin America and Africa.
Because supply is going to move higher, there’s only one thing that can keep the price of copper high: demand, to offset the supply. Specifically, Chinese demand.
That isn’t a surprise. China’s name is thrown around a lot these days, and sometimes its importance is overstated. Not so with copper. China's red metal consumption grew by 7.9 per cent in 2010, and the compound annual growth rate of its demand over the past 10 years is 10 per cent. (India’s is 8.4 per cent.) Contrast that with the U.S. CAGR, which is basically zero.
The copper story, then, is really and truly all about China. If demand stays heavy, production growth won’t be strong enough to send prices radically lower. If China falters, there’s sure to be trouble.